Channel left alone to combat grey market

A study unveiled by the non-profit AGMA and tax and advisory firm KPMG reveals improved channel management by original equipment manufacturers (OEMs) is needed to ensure customers receive authentic IT products.

In 2002, AGMA looked at the effects of the grey market – the unauthorized alternative channel where branded products have been intentionally diverted from authorized sales channels, and found a direct link between channel management and grey market exposure.

Today, their 2007 survey results show a curb in the growth and profits of the grey market due to better channel management. In the past five years, the grey market lost about $8 to $10 billion and grew at a slower rate than overall IT market.

But, stronger channel security has resulted in an increase of counterfeit products on the grey market, said AGMA Treasurer, Peter Hlavnicka.

“Because there is less grey market equipment out there, the product is usually mislabeled, used or counterfeit. In the past, merchandise on the grey market was at least genuine, now action has made genuine products more difficult to attain. So there is actually more risk of buying a counterfeit today than there was in 2002.”

The survey also found the processes for monitoring grey market impact are ineffective.

Results show 38 per cent of channel partners admit to receiving offers from the grey market. The main incentives for buying on the grey market are lower prices, which are often 25 per cent lower than authorized channel partner’s prices, and faster delivery.

The value of grey market averaged $58 billion in 2007. This accounts for a $10 billion loss of revenues for OEMs.

When customers end up buying products that were purchased off the grey market, they end up receiving products that are damaged, used, counterfeited or mislabeled. This ends up costing the OEM and the reseller more down the road in customer service fees and brand degradation.

Most channel partners know the grey market hurts their business, Hlavnicka said, but most are still purchasing goods from it.

While there has been an increase in channel management since 2002, it has not been effective because there are few checks in balances along the way, Hlavnicka said.Forty-eight per cent or almost half of all OEMs do not provide any verification for end user, he said.

Survey results show most channel partners believe their business would benefit from stricter security within the channel.

OEMs need to monitor sales data of their channel partners to find unusual buying trends, and ask the appropriate questions if patterns change, Hlavnicka said.

Audits are a good practice as general housekeeping.”

Resellers also need to educate their internal staff on the dangers of buying from the grey market, he said.

“The fact that the grey market has grown less since 2002 shows OEMs initial efforts have paid off. But they need to take the next steps and monitor the channel more closely and penalize those breaking contractual agreements.”

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